Don’t touch that pricing dial

Until a few months ago this is how JCPenney’s prices looked like. I show actual numbers in this chart for one product but you can take that model and apply to all their SKUs. Lots of red bars.

Starting with a high price with many discounts applied to it, leading to a low pocket price. Sales, coupons and free cash were the only way they were bringing shoppers into the store. All these meant signficant price leaks. When the entire marketing strategy is based on discounting and coupons the word waterfall assumes literal meaning.

When their CEO, Mr. Ron Johnson, of Target and Apple fame, took over he decided to plug all those pricing leaks.  Within a few weeks of taking over he put an abrupt end to this practice by going to what they branded as “Fair and Square” pricing.  No more markdowns, sales, coupons to clip or cash backs – one price.

As I have written before, effective pricing requires effective pricing communication. By branding the new pricing strategy (Fair and Square), changing the JCPenney logo to square and by running social media and Ad campaigns (some of which made it look like coupon clipping is a pain-point for customers) JCPenney did all the right things with their change.

All is well in the retail land? Did the Apple retail store magic rub-off on JCPenney?

JCPenney’s stock has taken a beating, dropping 20%, since it announced its last quarter earnings. Its revenue dropped 19%. Just for this quarter it reported a loss of $160 million.

Was it a bad decision to give up on discounting and move to Fair and Square pricing? Are the pundits right about pricing, that lower prices and greater service are the ways to profitability? Before the knives come out against the pricing move, ask this key question.

Where do you start for addressing your pricing problems?

This is not new to you if you have been reading my blog. I posed this question and answered it some time back. To set or change pricing you start with your target customers and understand why they are hiring your product. In the case of JCPenney, they had a perfect execution of pricing change skipping this first step.

Johnson hasn’t clearly defined who his target customers are and how he can get them to shop at J.C. Penney, says Craig Johnson, an industry consultant.

If you do not know your target segment (they likely are not Target’s or Apple’s segment and likely are not hiring JCPenney for reasons they were hiring Target or Apple) you cannot change your pricing strategy. You can apply pricing tactics or tweak it but not set your entire strategy.

The most important question in marketing comes from Clayton Christensen, “What job is your customer hiring your product for?”

“The problem with J.C. Penney is that people aren’t sure what it stands for anymore.  Even the new brands that Johnson has brought into the stores lack both a wow factor and a cohesiveness that would define who should be shopping there.”

Hence the results.

What does this mean to you as a marketer or a startup founder? I see several popular articles extolling the virtues of increasing prices and starting with higher prices. After all, “more money from fewer customers“, seems to make sense. Before you go  down this path, take a lesson from JCPenney.

Don’t touch the pricing dial before you understand your customers and their needs.

It isn’t ‘fair & square’ for consumers, it is ‘focus & simplify’ for JCPenney

This is a guest post by Praveen Rajasekar, an aspiring entrepreneurial product marketer pursuing MBA at GeorgiaTech.  This is his detailed analysis of pricing strategy change announced by JCPenney. See his full bio at the end of the article.

JCPenney (JCP) unravels a transformational plan attempting to change consumer retail experience.  Will its new ‘fair & square’ pricing strategy and month-long value promotions make it America’s favorite store? Perhaps, but it will depend on how effective these strategies are going to influence consumers in its target market.

Over the years, we as consumers have become accustomed to sales and discounts in retail stores. For some of us, buying a product on sale provides a sense of achievement. For others, it’s just common sense because you get used to the numerous sales and promotions. So the real question is will the new pricing and promotions at JCP change consumer buying behavior? An economist would say yes, with changes in price the quantity demanded changes. But as a marketer we are faced with irrational consumer behavior.

Marketers have long used pricing as a tool to signal quality. But with numerous sales and discounts, it may become counterproductive.  While prices ending in 0 are perceived to signal quality, based on the psychology of pricing, marketers have used prices ending in 9 to signal discount.  JCP has done away with $X.99 prices and has decided to round them to $(X+1).00 and has also limited the sales promotions to convey ‘We are a quality (not a discount) retailer’.

In addition, it has devised three types of pricing:

  1. Everyday prices – Regular prices, not everyday low prices.
  2. Month-long values –Better prices that change monthly based on seasonal needs.
  3. Best prices –Clearance-level rates on the 1st and 3rd Fridays of every month.
JCPenney Pricing Waterfall

It also promises consistent pricing strategy across all channels whether in-store or online.

What does this mean to us as consumers? Zero price discrimination. Wow, that sounds cool. But is it really enough to attract consumers? It depends.

Will we buy an IZOD shirt from JCP for $40.00 at their new everyday price or wait for it to be on sale at Macy’s for $34.99 down from $60.00 original retail price?

It depends on how quickly we need the shirt and whether we are willing to wait for a sale at Macys. Therefore JCP may not really win customers from its competitors overnight, using this pricing strategy. But, it has the potential to attract the customers who are in immediate need and are willing to pay the everyday prices. In addition, the new return policy allows customers to return any merchandise at any time for any reason and might provide JCP an advantage over its competitors.

Apparently for JCP, past promotions did not make a big impact on sales, as it ran 590 promotions in 2011 and the average number of customer visits was only four, which implies that 99% of the times customers ignored those promotions. Now, JCP has decided to simplify and provide month-long promotions instead of a plethora of other promotions provided thus far. This definitely provides a level playing field for all customers. But whether the price offered during that period is within the customers’ willingness to pay is something to watch out for, especially as retailers fiercely compete for market share by undercutting each other across both brick and mortar stores and online channels.

It is also critical to note the JCP with a slew of brands (including Martha Stewart® introduced at the launch event) is attempting to attract a wide range of customers. Some of whom might welcome the new changes while others still vie for more discounted brands. With such a broad spectrum of consumers in JCP’s target market it is unlikely to become America’s favorite in the near term. To do so would mean changing customer expectation of exclusive sales and deep discounts.

JCPenney’s ‘fair & square’ pricing strategy appears to be part of a bigger ‘focus & simplify’ retail strategy and logically doesn’t seem radical or game changing in isolation. But with the broad promotions and personality branding, along with the future suggested changes in products and retail stores, the strategy holds promise. Especially, if consumers start realizing that JCP consistently offers lower prices in comparison to its competitors, without the hassles of coupons. As Ron Johnson articulated in the conclusion of the launch event– ‘Every journey begins with a first step!

Related Posts:

  1. Price Realization – JC Penney Price Leaks
  2. Price Elevator – JCPenney on Loss Leaders
  3. Pricing starts with customer segmentation
  4. Price realization by GoodYear
  5. Black Friday Sale – Price Discrimination
  6. What if there were no price tags?

Bio: Praveen Rajasekar is an aspiring entrepreneurial product marketer. He has an undergraduate degree in computer science and engineering. After 6 years of IT consulting for Fortune 500 clients, he is pursuing full-time MBA at Georgia Institute of Technology, focusing on Marketing and Strategic Management. He is a Warren Batts fellow in the TI:GER® (Technological Innovation: Generating Economic Results) program, developing business plan and go-to market strategy for new research technology. He is an avid foodie and vivacious volleyball player.